Academic Freedom at a Cost: Harvard’s Response to Federal Pressure

Photo by Xiangkun ZHU on Unsplash

Harvard University holds a sizable $53.2 billion endowment, positioning the renowned academic stronghold as a prominent institutional investor amongst the United States’ broader financial landscape. In managing such a substantial endowment, universities typically employ sophisticated investment strategies emulating those used by hedge funds and professional asset managers to maximize returns. As a result, when political pressure is exerted on such an influential financial power, there are far-reaching implications that may be felt throughout the wider financial system. This situation describes Harvard’s current predicament in light of their recent confrontation with the Trump administration after the university refused to comply with the White House’s demands to overhaul its hiring, admissions, and teaching practices. In a letter to the university, the government proposed changes such as reporting students to the federal government who pose hostile threats to “American values”, and hiring a government-approved third party to audit academic programs that “most fuel antisemitic harassment.” Met with Harvard’s denial of government control, the Trump administration responded by freezing $2.2 billion in federal research funding, positing the idea of imposing an endowment tax increase, and instructing the IRS to potentially revoke Harvard’s current status as a tax-exempt organization. 

Political Risk and Bond Disclosure

Harvard University’s plan to issue up to $750 million in taxable bonds comes as a response to the Trump administration’s freeze on more than $2.2 billion in federal funding. Harvard has a sizable endowment of $53.2 billion, but much of that endowment is restricted or illiquid, meaning the funds are legally earmarked for specific purposes and not readily available to cover general operating expenses impacted by the federal funding freeze. The bond issuance provides flexible, unrestricted capital to manage Harvard’s short-term financial needs without violating donor-imposed limitations. Because these are taxable bonds issued by a private institution, they qualify as securities under the Securities Act of 1933 and are subject to SEC regulation. This includes registration requirements (unless an exemption applies) and mandatory disclosure of material risks. The loss of federal funding, reputational fallout, and potential legal consequences may all constitute material information that must be disclosed to prospective investors. If these events are likely to affect Harvard’s financial position, liquidity, or standing in the public eye, they fall within the SEC’s disclosure requirements.

The situation with Harvard raises the question of whether politically motivated defunding could become a material risk that institutions like universities must disclose in bond offering documents. Public companies are already required to disclose regulatory and political risks in their 10-K filings when such risks could affect their business or financial condition. Similarly, if universities face funding threats based on political disagreements or refusal to comply with ideological demands, this could represent a significant risk to their financial stability and reputation. As investors increasingly consider environmental, social, and governance (ESG) factors, the potential for government retaliation tied to institutional values or speech may become a key disclosure area. Going forward, universities issuing bonds may need to be more transparent about their exposure to political pressure and the steps they take to safeguard their independence, which could influence both investor confidence and broader investment strategy.

Fiduciary Duties and Donor Impact

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is a uniform state law that provides fundamental rules for the investment of funds held by charitable institutions and the expenditure of funds donated as “endowments.” Almost every state and U.S. territory has adopted the UPMIFA except for Pennsylvania and Puerto Rico. In particular, the Massachusetts endowment law is governed by the UPMIFA. The UPMIFA also sets guidance for endowment fiduciaries. Under the UPMIFA, the standards for managing institutional funds apply whether a charitable organization is organized as a trust, a nonprofit corporation, or another entity. The fiduciary should consider the charitable purposes of the institution and the fund when making investment decisions. The fiduciary should also provide instructions to investment managers that are consistent with the purposes of the institution and fund, and must monitor the managers’ compliance.

Harvard holds firm that it will not acquiesce to the demands of the Trump administration, which includes directions on how to govern, hire, and teach. In the past, donors to Harvard stopped their contributions to the university during Hamas’ terror attacks in 2023. Donors have ended their support because of the school administrators’ response to alleged anti-Israel speech and antisemitism on campus. In 2024, donations to Harvard dropped nearly 15%, and Harvard’s endowments fell by 34%, dropping to $368.1 million from $560.6 million in 2023. However, Harvard’s investment fund still gained 9.6% for the fiscal year, bringing its total value to $53.2 billion. Currently, Harvard is looking for support from major donors to resist demands from the Trump administration, but this hasn’t been an easy task. Some donors have insisted that Harvard find common ground with the Trump administration and urge the university to focus on protecting the civil rights of Jewish students, while other donors encourage Harvard to stand firm against the administration. Additionally, Harvard received over $1 million in donations from alumni after their president, Alan M. Garber, announced that he would not comply with the administration. However, other major donors who have halted donations in 2023 remain silent on any further donations on the current issue. While Harvard continues to receive some support from donors, the university will have to face varying opinions from donors who either promote the school’s priorities or suggest that the school align itself with the Trump administration’s demands.

The Impact on Broader Capital Markets 

A rise in political interference in the operations of prominent institutional investors like Harvard could have a disparate impact on capital markets overall. If maintaining institutional integrity is met with retaliatory disciplinary actions as imposed by Trump, investors may be led to value political compliance instead of traditionally sound financial concerns. Instead of making investment decisions with goals like maximizing returns, contributing to the market, and advancing their educational mission, institutional investors will act ingenuously out of fear of political backlash to conform to the prevailing administration’s priorities. 

Additionally, the potential for such politically motivated reprisal could create a chilling effect on mission-driven investing or Environmental, Social, and Governance (ESG) strategies. If institutions are too wary of political repercussions for investments that align with their core values, as seen in the case of Harvard facing scrutiny over its handling of campus protests and diversity initiatives, they will likely be afraid to pursue such strategies, even if they believe in their lasting value or alignment with their key mission statements. This could stifle the growth of sustainable and responsible investing, ultimately impacting how capital is allocated in the broader market.

How Harvard is essentially being punished by the government in this case serves as a potent example of how political pressure can be applied to a key financial institutional actor. This demonstrates the potential for future administrations to use similar tactics against other institutions that do not align with their political ideologies. In the words of Professor Vasquez Heilig, “once the government is allowed to reshape private institutions through political pressure, future administrations will likely follow suit.” Such a climate of uncertainty and potential retaliation could fundamentally alter the risk-reward calculations for institutional investors, pushing them towards more politically palatable, even if not economically optimal, investment decisions.

The battle between Harvard University and the Trump administration sits at the intersection of public policy, political risks, fiduciary responsibilities, and capital markets regulation. The administration’s demands place high political pressure on Harvard’s autonomy as a university. The university’s actions in response to the administration could affect not only the school’s policies, reputation, donors, and students, but also investors’ behavior from its issued bonds due to political influences. This matter raises additional questions on how securities laws should evolve to account for politically-motivated investment behavior and whether political risk disclosures will be required from universities. As the dispute continues, Harvard’s actions will be under scrutiny for their potential impact on other universities and its investors.

*The views expressed in this article do not represent the views of Santa Clara University.